J&J Snack Foods Corp. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 26, 2011, and the six-month period ended on the same date. J&J Snack Foods Corp. operates in three reportable segments: Food Service, Retail Supermarkets, and Frozen Beverages. The company manufactures and distributes soft pretzels, frozen juice treats, desserts, churros, and frozen beverage products.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Mar 26, 2011 | 6 Months Ended Mar 26, 2011 |
|---|---|---|
| Net Sales | $162,731 | $318,363 |
| Gross Profit | $49,022 | $95,123 |
| Gross Margin | 30.1% | 29.9% |
| Operating Income | $13,954 | $24,927 |
| Net Earnings | $8,659 | $15,753 |
| Diluted EPS | $0.46 | $0.84 |
| Cash & Equivalents (Balance Sheet) | $96,436 | |
| Net Cash from Operating Activities (6mo) | $29,462 | |
| Total Debt (Capital Leases) | $743 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3% ($5.4M) for the quarter and 4% ($11.9M) for the six months compared to the prior year. Organic growth (excluding acquisitions) was 1% for the quarter and 2% for the six months.
- Profitability Decline: Net earnings decreased 4% ($341k) for the quarter and 2% ($338k) for the six months. Operating income fell 6% for the quarter and 5% for the six months.
- Margin Compression: Gross profit margins declined from 31.65% to 30.12% (quarter) and 31.27% to 29.88% (six months) due to higher ingredient and packaging costs, specifically flour.
- Segment Performance:
- Food Service: Sales up 2% (quarter) and 3% (six months). Operating income declined due to commodity costs. Significant sales loss in funnel cakes to one major customer.
- Retail Supermarkets: Sales up 14% (quarter) and 13% (six months), driven by volume increases in frozen juices and ices.
- Frozen Beverages: Sales up 2% (quarter) and 3% (six months). Operating loss widened in the six-month period due to higher payroll, maintenance, and gasoline costs.
Outlook, Risks, and Management Commentary
- Cost Pressures: Management anticipates higher costs for the remainder of fiscal 2011 due to significant increases in flour and other commodity prices. While price increases have been implemented, they may not fully offset cost increases, potentially resulting in lower net earnings for the full year.
- Acquisition Activity: On April 15, 2011, the company agreed to acquire the frozen handheld business of ConAgra Foods for $10 million. The business has annual sales of approximately $50 million but is not expected to contribute operating income in the short term. Closing is expected in May 2011.
- Liquidity: The company maintains a $50 million revolving credit facility with no outstanding balance as of March 26, 2011. Cash and cash equivalents increased to $96.4 million.
- Dividends: A quarterly cash dividend of $0.1175 per share was declared, payable April 6, 2011.
- Risks: Key risks include volatility in raw material costs (flour, packaging), consolidation of customers, and the impact of gasoline costs on the Frozen Beverages segment.
Investor Verification Checklist
- Verify the extent of price increases implemented to offset rising flour and commodity costs.
- Monitor the integration and financial performance of the pending ConAgra Foods frozen handheld business acquisition.
- Assess the long-term impact of the loss of the major funnel cake customer on the Food Service segment.
- Review the trajectory of gasoline costs and their effect on the Frozen Beverages segment operating loss.
- Confirm the company's ability to maintain gross margins above 30% in the second half of the fiscal year.